[Senate Hearing 106-516]
[From the U.S. Government Publishing Office]
S. Hrg. 106-516
SWINDLING SMALL BUSINESSES: TONER-PHONER SCHEMES AND OTHER OFFICE
SUPPLY SCAMS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 28, 2000
Printed for the Committee on Small Business
______
U.S. GOVERNMENT PRINTING OFFICE
64-206 CC WASHINGTON : 2000
_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Office
U.S. Government Printing Office, Washington, DC 20402
COMMITTEE ON SMALL BUSINESS
ONE HUNDRED SIXTH CONGRESS
----------
CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana JOHN F. KERRY, Massachusetts
PAUL COVERDELL, Georgia CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah TOM HARKIN, Iowa
OLYMPIA J. SNOWE, Maine JOSEPH I. LIEBERMAN, Connecticut
MICHAEL ENZI, Wyoming PAUL D. WELLSTONE, Minnesota
PETER G. FITZGERALD, Illinois MAX CLELAND, Georgia
MIKE CRAPO, Idaho MARY LANDRIEU, Louisiana
GEORGE V. VOINOVICH, Ohio JOHN EDWARDS, North Carolina
SPENCER ABRAHAM, Michigan
Emilia DiSanto, Staff Director
Paul Cooksey, Chief Counsel
Patricia R. Forbes, Democratic Staff Director and Chief Counsel
(ii)
C O N T E N T S
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Opening Statements
Page
Bond, The Honorable Christopher S., Chairman, Senate Committee on
Small Business, and a United States Senator from Missouri...... 1
Witness Testimony
Bailey, Joan, Administrative Assistant, Brownstone Real Estate
Company, Hershey, Pennsylvania................................. 5
Easton-Saunders, Linda, Database/LAN Administrator, Prospect
Associates, Silver Spring, Maryland............................ 14
Everding, George, Communications Coordinator, Feed My People, St.
Louis, Missouri................................................ 22
Grosfeld, Peter, Miami, Florida.................................. 24
Duffy, William R., President and Chief Executive Officer, Imaging
Supplies Coalition for International Intellectual Property
Protection Inc., Lexington, Kentucky........................... 30
Burke, Tricia, Vice President, Office Equipment Company, Inc.,
Louisville, Kentucky, on behalf of Independent Office Products
& Furniture Dealers Association, Alexandria, Virginia.......... 39
Bernstein, Jodie, Director, Bureau of Consumer Protection,
Federal Trade Commission, Washington, D.C...................... 51
Alphabetical Listing and Appendix Material Submitted
Bailey, Joan
Testimony.................................................... 5
Prepared statement and attachment............................ 8
Bernstein, Jodie
Testimony.................................................... 51
Prepared statement and attachments........................... 54
Bond, The Honorable Christopher S.
Opening statement............................................ 1
Attachment to statement...................................... 4
Burke, Tricia
Testimony.................................................... 39
Prepared statement and attachment............................ 42
Coverdell, The Honorable Paul
Prepared statement........................................... 83
Duffy, William R.
Testimony.................................................... 30
Prepared statement........................................... 34
Easton-Saunders, Linda
Testimony.................................................... 14
Prepared statement and attachment............................ 17
Everding, George
Testimony.................................................... 22
Grosfeld, Peter
Testimony.................................................... 24
Prepared statement........................................... 27
Kerry, The Honorable John F.
Prepared statement........................................... 84
Comments for the Record
United States Postal Inspection Service, Washington, D.C.,
statement and attachment....................................... 86
Xerox Corporation, Rochester, New York, statement................ 118
SWINDLING SMALL BUSINESSES:
TONER-PHONER SCHEMES AND OTHER
OFFICE SUPPLY SCAMS
----------
TUESDAY, MARCH 28, 2000
United States Senate,
Committee on Small Business,
Washington, D.C.
The Committee met, pursuant to notice, at 9:43 a.m., in
room SD-562, Russell Senate Office Building, the Honorable
Christopher S. Bond (Chairman of the Committee) presiding.
Present: Senator Bond.
OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND,
CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED
STATES SENATOR FROM MISSOURI
Chairman Bond. Good morning. The hearing will come to
order. Unfortunately, my colleague and Ranking Member, Senator
Kerry, has a Commerce Committee hearing in which he is deeply
involved, so he will not be able to join us.
Last fall this Committee commenced a series of hearings on
deceptive or unfair trade practices that are particularly
harmful to the small business community. Our first hearing
focused on slotting fees, a method that large companies use to
preclude competition from small businesses getting onto
supermarket shelves. The Committee then followed up with a
hearing on unscrupulous web site creators cramming unauthorized
charges onto the telephone bills of unsuspecting small
businesses.
Today's hearing is the third in this series. This morning
we will address another scam targeting small businesses; the
fraudulent telemarketing of office suppliers, particularly
copier and printer toner. While the fraudulent telemarketing of
toner cartridges may at first glance seem to be ``no big
deal,'' I am here to tell you that it is actually an
extraordinarily widespread problem, and to be this high on our
agenda it has to be. The Committee has received estimates that
this type of fraud victimizes businesses up to $250 million per
year.
The toner cartridge in my hand is the tool scam artists use
to ensnare small businesses. This is what is being sold, and
these cartridges are usually of very inferior quality and are
sold at very inflated prices.
The FTC has several ongoing investigations of companies
that deceptively cold-call businesses to sell toner cartridges.
According to the FTC, the offers are rife with fraudulent
statements and misrepresentations. The bottom line on these
types of scams is that small businesses and non-profit entities
are shipped low-quality office supplies that they did not order
at grossly inflated prices, sometimes up to 20 times
conventional prices.
Our witnesses today will testify about the many different
methods these scam artists use to persuade small businesses to
accept shipments of vastly overpriced toners. In many cases,
the telemarketers will expressly or implicitly represent that
they are associated with the business' regular supplier of
photocopier toner or the photocopier manufacturer. The
telemarketers may also represent that they are calling to
confirm an order placed by an employee's predecessor when no
order had been previously placed.
In addition, the companies may call a business to receive
the name of an employee and then ship unordered merchandise and
an invoice containing that particular employee's name. It is
not uncommon for telemarketers to send a free gift to employees
with whom they have spoken so that the employees feel obligated
to pay the invoice they receive.
One of the most common practices is for telemarketers
falsely to claim that prices have or are about to increase, but
as a courtesy--what a courtesy--an order has been reserved for
the business at the ``regular'' price. It would be more
appropriate to state that the prices are highly ``irregular.''
As some of our witnesses will testify today, the prices of the
toner cartridges sold by telemarketers are substantially higher
than prices for similar products available from reputable
suppliers.
Once the telemarketer has scammed a business into agreeing
to accept the delivery of the toner, it may use several other
methods to coerce businesses into paying. Typically, invoices
are sent a week following the unordered merchandise as the
inflated price is not as obvious after the merchandise has been
stocked and there is a reasonable chance that it has already
been used.
Moreover, the fraudulent telemarketers usually spend
significant time and energy on collection efforts including,
drafting invoices containing unenforceable contract terms to
coerce businesses into paying; stamping ``Past Due'' on first-
time invoices; resorting to bogus or real collection agencies;
threatening legal action; negotiating lower prices; or claiming
that if the items are to be returned, the company will be
charged a ``restocking fee.''
Finally, if the telemarketer finds a business that is
willing to pay for the overpriced toner, a telemarketer will
``reload'' and send unordered merchandise and invoices as long
as the business continues to pay.
While the FTC and certain States' attorneys general have
been active in prosecuting businesses engaged in deceptive
office supply sales, they have limited resources. To be
successful in putting these scam artists out of business it is
imperative that the Federal Government act as an information
clearinghouse. We must ensure that small businesses and small
not-for-profits are aware of the scams, and inform them how
they can protect themselves. That is why we are holding the
hearing today.
We do not need to change existing law to provide the
authority to Federal law enforcement agencies to prosecute
fraudulent telemarketers. The FTC already has the authority to
seek civil penalties. The Department of Justice has the
authority to prosecute criminally bad actors. The FBI and the
Postal Inspection Service also have the authority to
investigate the fraudulent sale of office supplies.
The FTC has been particularly active in bringing
enforcement actions in this type of fraud, and their efforts
are ones we commend. Nevertheless, it appears that even
companies that are successfully prosecuted often simply change
their business name and continue the same fraudulent
activities. The Committee is interested in hearing about what
the FTC and other agencies are doing to decrease recidivism,
and what Congress can do to assist in their efforts. My
personal view is that that might begin to border on the
criminal responsibility side.
Additionally, the Committee has learned that many States'
attorneys general may not have appropriate statutory authority
to seek civil penalties. While most States have ``Little FTC
Acts,'' which prohibit deceptive business practices, some of
these acts may not apply to sales of business to business.
Accordingly, we intend to work with States through their
legislatures, Governors, and attorneys general to suggest to
them that this business-to-business scam merits their attention
as well.
The FTC has been extremely helpful in providing the
Committee with background information on this problem and their
enforcement actions. I am especially grateful for the
extraordinary effort of FTC Chairman Robert Pitofsky, and FTC
staff members Elaine Kolish, James Reilly Dolan, Elena Paoli,
and Matthew Downs.
[An attachment to the statement of Senator Bond follows:]
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Chairman Bond. We are fortunate to have four panels this
morning. Our first panel consists of representatives of two
small businesses, and a non-profit organization that were
targeted by fraudulent telemarketers. Our second panel is an
ex-employee of a telemarketing company who will give us a look
inside as to how these operations work. The third panel
consists of a representative of the ISC, and a reputable small
office supply firm. Finally, a fourth panel, a representative
of the FTC who will give us the results of its recent
enforcement actions and a new grass roots education initiative.
We look forward to hearing from and working with each of our
witnesses.
Accordingly, to begin the hearing I would like to call as
the first panel Ms. Joan Bailey, administrative assistant,
Brownstone Real Estate Company, Hershey, Pennsylvania; Mrs.
Linda Easton-Saunders, data base and LAN administrator,
Prospect Associates, Silver Spring, Maryland; and Mr. George
Everding, communications coordinator, Feed My People, St.
Louis, Missouri.
As you come forward I am going to submit for the record a
statement from Senator Coverdell.
[The prepared statement of Senator Coverdell is in the
Appendix:]
Chairman Bond. I also submit for the record a statement
from the Xerox Corporation in Rochester, New York; and a
statement from the Postal Inspection Service in Washington,
D.C.
[The statements are in the Comments for the Record:]
Chairman Bond. Good morning and welcome. Ms. Bailey, would
you care to begin?
STATEMENT OF JOAN BAILEY, ADMINISTRATIVE ASSISTANT, BROWNSTONE
REAL ESTATE COMPANY, HERSHEY,
PENNSYLVANIA
Ms. Bailey. Thank you. First off, I want to introduce our
firm. I am with Brownstone Real Estate Company, an independent
real estate brokerage firm in Hershey, Pennsylvania. We have
been in business since 1971. I joined the firm in 1995 and have
acted as the administrative assistant since 1998. My
responsibility include ordering and monitoring inventory of
office forms, supplies, and items for computers, fax machines,
and our copiers.
At this time I would like to explain my recent experience
with a distribution company that solicited us for business. On
July 7, 1999 I received a phone call. As per standard practice
I identified myself and asked the caller how I could be of
assistance. A female responded, ``Hi, Joan, I am calling about
your Lanier copier. What is the serial number on your copier?''
My initial response was, ``Why do you need that?''
I was told there was a pending price increase on toner and
the caller wanted to get me under the old pricing of $549. I
asked how much of a price increase and was quoted a
ridiculously high amount like $800--a very drastic difference.
I told the caller I would have to verify this offer with
our accountant and asked her to please hold. I explained this
offer, as I understood it, to our accountant--toner prices were
about to increase for our Lanier copier, but if we acted
immediately we could still get the old pricing. The accountant
and I compared the offer with our most recent purchase of
similar toner which we purchased on May 18, 1999. At that time
we had paid $695 for one case of four toner bottles. So this
was a natural assumption on my part that this was a case. We
were not in dire need of toner at the time, but given the
price, both my accountant and I felt that it would be
beneficial to make this purchase at this time.
When I returned to the person who was on hold, who I
believed to be a Lanier representative, I informed her we would
take advantage of the offer. I, of course, gave her my name and
complete mailing address.
I did not give another thought to this purchase until the
next day, July 8, when a gentleman called identifying himself
as ``Bill.'' He told me he was calling to verify my toner
purchase, which I did confirm. Again, I did not think anything
of this out of the ordinary because Bill is the name of our
copier repairman with Lanier. Coincidence? I do not know. I do
remember thinking it a bit odd that Bill was calling in
reference to a toner order, but maybe Bill made a job change. I
do not know.
A week later, about July 19, I received another call from
Lanier--this one from our representative, Brooks Bracken, who I
had spoken with many times. She wanted to know if we needed
anything in the way of supplies, particularly toner. I asked,
``How many times is Lanier going to call wanting to know if we
need toner? How many copies do you think we make in a week?''
She informed me this was her first call she had made in
this current quarter, and furthermore, she was the only one to
contact me for an order. My first red flag went up.
She immediately wanted to know who had called and how they
represented themselves. I repeated the chain of events ending
with how I purchased the toner. This was when I first heard the
term ``Paper Pirates.'' I was furious, embarrassed to think I
was swindled by this fast-talking rep, but our only consolation
at this time was the fact that we had not yet received it and
we were not out of any money. Now my true Lanier representative
faxed me completed details educating me on what I had just
fallen victim to. With her help and per enclosed instructions I
began to prepare for when this toner finally arrived.
That was on or about July 20, 1999. I was shocked to find
the box contained only one bottle of toner, not the case of
four I had expected. The enclosed packing slip was not from
Lanier, but rather Global Distribution Center located in Marina
Del Rey, California.
Chairman Bond. This is what you received?
Ms. Bailey. Right. An invoice was not included. I have
since learned that is part of the scam--hoping that you would
open the package, use it, and then, of course, feel obligated
to pay. Thanks to Lanier that was not going to happen. I made a
copy of the toner label and the packing slip; packed the toner
back up and waited for the invoice to arrive.
On or about August 2, 1999, 13 days later, the invoice
arrived separately. I was appalled at the charge of $549 for
this single bottle of toner. In addition there were $60.40 in
shipping charges that were never disclosed in our original
conversation. August 5, per Lanier's instructions, I sent a
brief but direct letter to Global Distribution Center.
Basically stating, ``You misrepresented the sale.'' Get your
things within 30 days or we are going to get rid of it. ``We do
not want it.'' But I did forget in my haste to send it
certified.
On that same day I sent a copy of this letter, all the
pertinent information: packing slip, invoice, and toner label,
to the names and organizations on the list I received from
Lanier which was part of this. So to get rid of this I just
made a file, ``Information'' and filed it.
August 9 we received an invoice for $609.40. I told the
accountant, forget it, we are not paying it. Disregard it.
August 12 our accountant received a call from Kelly Glen of
Global Distribution Center regarding payment of this toner. Our
accountant informed her we sent her a letter and we had no
intention of paying it. Ms. Glen claimed Global had not
received it. We asked for the fax number and said we would
gladly fax that letter over, at which time she informed me
according to terms and conditions we had 15 days. We were past
that 15 days. We told her basically, end of discussion. The
toner is here. You come get it. We are not paying for it, and
we are not paying anything else.
When she received this fax Kelly Glen responded with a
letter dated August 12 very different to the events that
occurred, basically outlining they were up front, they always
identify themselves, they made it clear how many it was. Not
the case. August 16, a United Parcel service tag was issued and
the toner was finally picked up. On that same day however we
did receive another invoice for $609.40 and we figured it just
crossed in the mail. August 26, we received a final invoice
stamped past due. We responded on August 27, by remailing
everything we had sent, a copy of our letter, Kelly Glen's
letter, and again stating we are not paying this. We are done.
Basically we thought that was the end, and as far as that
company, it was. But it was not the end of the calls from the
toner-phoners. To this day I receive many calls. Again they do
not identify themselves or they will just give a first name,
but do not give a company name. They use similar lines, we want
to call about your copier, do you have that number? And all we
have to basically say is, ``Don't you have it? You would if you
were my representative.'' What I have learned is, it is very
easy to really get rid of them. You ask what their name is,
they hang up. ``Who are you with?'' They hang up.
So I feel lucky that Lanier educated us, and that we were
not taken by this. There are similar incidents that have
happened, not just toner-phoner. In conclusion, I would like to
express my need for the continued investigation, not only of
the toner-phoner and office supply scams but all who are
constantly trying to swindle small businesses. This heightened
distrust of business relationships has a severe impact on the
workplace environment. Basically, can we not trust anyone?
Thank you.
[The prepared statement and attachment of Ms. Bailey
follow:]
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Chairman Bond. Thank you very much, Ms. Bailey. Thank you
for going through the steps with us and outlining how your real
supplier was very helpful. We congratulate you on standing up
to them.
Ms. Linda Easton-Saunders.
STATEMENT OF LINDA EASTON-SAUNDERS, DATABASE/LAN ADMINISTRATOR,
PROSPECT ASSOCIATES, SILVER SPRING, MARYLAND
Ms. Easton-Saunders. Good morning. I am Linda Easton-
Saunders and I have been employed with Prospect Associates for
the past 5 years. I am the data base/LAN administrator in the
Information Technology department. As part of my job I cost and
purchase computer and printer hardware, software, and supplies
for the company.
On approximately October 3, 1997, I received a telephone
call from a female from WorldTech Computers selling toner
cartridges. I recall that the female was very rude after I told
her that we did not buy toner from phone calls. She said,
``What kind of manager are you? Don't you want to save your
company money?'' I again told her that we were not interested.
A day or so later I was paged while I was in a meeting to
answer a phone call from a man from the same company. I told
him that I was in a meeting and that we only buy authentic HP
toner, not remanufactured. A man identifying himself as Sam
Million, office manager, called back later. I told him that we
only buy HP and that I did not appreciate his salespeople and
their attitudes. He said that he did not train their people
that way and would talk to them.
He then said they were working with HP on a pilot program
with a new type of toner which would produce more copies since
it had 300 grams instead of 100 grams. Also the drum was longer
lasting and he was willing to invite us to try it saying, ``How
can we sell it if you do not try it?'' He said that if we did
not like it after trying it we could send it back and owe
nothing. He also offered to send a promotional gift, a clock
radio, along with the toner, that I could keep whether we kept
the toner or not. I then said, go ahead, just to get rid of
him.
Not being sure that this was an HP promotion I went on the
Internet to the HP site to see if I could find out anything
about this new pilot program. Finding nothing on this, I called
HP to ask them about it and was told that this was not an HP
program.
HP put me in contact with Thomas G. Byrne, an investigator
with M. Morgan Cherry & Associates, who told me to accept the
toner cartridge and call him when it arrived. I received the
Laserjet 5Si MX toner cartridge on October 16, 1997, via UPS
and called Mr. Byrne. I recall meeting Mr. Byrne and talking to
him about my experience and at some point giving him the toner,
but I do not have the dates when this occurred documented.
I was sent a fax on October 20, which gave me the e-mail
address and fax information for Toni Berria, HP's supplies
operations person. On October 21, I sent an e-mail to Toni
advising her that I had received the invoice from WorldTech for
$297.50. This price was double the price that I normally pay
for the same toner. I mentioned in the e-mail that there were a
couple of sentences on the back of the invoice that I could
raise an objection with. One of them is the SOLE AGREEMENT
which is on the terms and conditions up here on the exhibit.
I also told Ms. Berria that WorldTech had represented the
toner as being HP toner and not remanufactured toner and on the
front of the invoice it said, ``LASERJET means high
remanufactured quality.'' I felt that this was something that I
could object to as I did not agree that the invoice supersedes
anything told to me over the phone.
On October 27, I called and talked to Paul Derek who
claimed to be the general manager of WorldTech. I informed him
that I was not happy and wanted to talk to Sam Million, office
manager, to tell him that he had misrepresented their product.
Mr. Derek informed me that he was Mr. Million's boss. I let him
know that Mr. Million had told me their product was HP toner
and it was not remanufactured, as I had informed Mr. Million
that we only buy HP toner and do not purchase remanufactured
toner.
I also informed him that Mr. Million had stated that
WorldTech was selling these toners under a pilot program
approved by HP. Mr. Derek appeared to be upset stating that Mr.
Million cannot do this as it is illegal. He went on to state
that he was going to reprimand Mr. Million today and Mr.
Million would be suspended.
I asked Mr. Derek to explain further about the toner. He
said that the parts are remanufactured, the drum has been
recoated and is stronger than HP's, which makes it last longer.
They put 300 grams of microfine toner, approved by HP, in their
cartridges instead of the 150 grams which is put in HP's
cartridges. Comparing apples to apples, HP toner will render
11,000 to 12,000 copies while their toner will render around
30,000.
He stated that they have been in business for over 20 years
and HP approves their product. He even told me to check with
HP. He asked that I try the product and offered to lower the
price to $240 including shipping and handling. He also stated
that if I liked the product he would keep the $240 for future
orders.
On October 30, 1997, M. Morgan Cherry & Associates sent
Prospect a check for $240 to cover the cost of the toner
cartridge that was received. Prospect in turn cut a check to
WorldTech Computers to pay for the toner.
On November 18, 1997, I received a call from WorldTech. The
man on the other end said he was my toner representative. He
mentioned receiving our check and something about closing out
the account, which confused me. He then said that WorldTech was
going to send me five cartridges because they have a minimum
order and that the one we received was only a trial. This
statement angered me and I said, ``NO, we do not want any more
cartridges.'' He restated that they have a minimum order. In my
anger, I was extremely rude and said some bad words and said
that I did not care about his minimum order. I do not want any
more cartridges. Take us off of your list. Do not call me any
more. He was taken aback and then hung up.
I did not hear from WorldTech again until about a year ago.
The person said she was from WorldTech and she wanted to know
what type of printer we had. The name rang a bell and I
immediately said that I had dealings with them before and that
I did not want to buy any toner from them. The person hung up.
I receive many phone calls from people trying to sell toner
cartridges. Most of them use similar tactics as WorldTech's.
Some are quite creative and change how they approach their
caller. Some will talk as if they are a long-standing supplier,
when in fact you have never heard of them. Many will start out
saying they had a gift they want to send and ask which one you
would prefer, like the computer cleaning supply vendor that
said she had a sports cap and which team did I want on it. When
I told her I have never done business with her company before
and did not plan to, all of a sudden the niceness went away.
She was no longer my long lost buddy, and hung up.
I have learned to tell these people that we have a contract
with a vendor already and do not wish to purchase any from
them. Unfortunately, not all small businesses are aware of the
scams out there and get caught by these companies. They are
cunning and continually changing their tactics to catch the
consumer unaware.
These companies have been doing this for over 30 years that
I can recall going back to when I was an office manager at a
small plastics plant back in Michigan. I do not know what you
can do to stop these people but I hope you will continue to
look into this problem and come up with a solution.
Once again, thank you for the opportunity to testify before
your committee today.
[The prepared statement and attachment of Ms. Easton-
Saunders follow:]
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Chairman Bond. Thank you very much for providing us that
story, Ms. Easton-Saunders, and thank you for being strong with
those people. Unfortunately, a few bad words apparently is not
enough to discourage them.
Now let us turn to Mr. Everding. Welcome.
STATEMENT OF GEORGE EVERDING, COMMUNICATIONS COORDINATOR, FEED
MY PEOPLE, ST. LOUIS, MISSOURI
Mr. Everding. Thank you, Mr. Chairman, for allowing me to
testify at this hearing. My name is George Everding and I live
in St. Louis, Missouri. I retired from the U.S. Navy after
having served over 32 years of active duty as an officer and
enlisted man.
For almost 15 years I have been a volunteer at Feed My
People, a charity organization located in St. Louis County.
Feed My People is dedicated to feeding the poor and hungry, and
to helping them become independent, self-supporting citizens.
In addition to food, clothing and help with utility bills, we
provide budget and job search counseling and a variety of other
services. Our board of directors is made up of representatives
from over 25 churches of various denominations.
I am the communications coordinater at Feed My People.
Among my duties is the maintenance and support of computers,
copiers, and other office equipment. Feed My People has over
300 volunteers and only five paid employees, so we have
different volunteers at the reception desk each day. Sometime
in 1997 our volunteer receptionist received a call from a
representative of Ikon Supply Service. He asked our
receptionist what kind of office copier we were using. She
looked at our copier and told him the make and model number
which was printed on the side of the machine.
When he asked who did the ordering of office supplies she
transferred the call to me. He started the conversation by
saying that there would soon be a price increase in the cost of
the Xerox dry toner cartridges we used in our copier. Since he
seemed to be familiar with our equipment I assumed that he was
from Ikon Office Solutions, a supplier with an office in our
local area.
The caller offered a special price of $329 if four toner
cartridges were ordered. His implication was that the $329 was
for the box of four toners. This would have resulted in a price
of about $80 per cartridge, a price somewhat less than we had
been paying. Since we were in need of toner at that time I
consented to order four cartridges.
Shortly after this I went into the hospital for emergency
repair of an aortic aneurysm. When I returned a month or so
later Shirley Beeson, Feed My People treasurer, said she had
been receiving several collection calls from Ikon Supply
Service in California demanding payment for toner cartridges.
She had no record of having received an invoice or a bill from
them so I asked Ikon to fax a copy of the invoice. We received
an invoice for two dry ink cartridges at $329 each. None of our
volunteers could remember having received a package from Ikon
but I found two cartridges in our storeroom so I told Shirley
to pay the bill. First mistake.
In March or April 1998 Shirley began to receive calls from
a Steve Nelson asking for payment for four cartridges
supposedly shipped in December 1997. This time I asked for a
UPS receipt as well as a copy of the invoice. We received
invoice number 98775 for four cartridges at $329 each for a
total of $1,316, and a UPS receipt. The UPS receipt indicated
that a package had been delivered on December 10, 1997, but did
not indicate the weight or size of the package. And it was a
copy of a copy and illegible in some places. I now believe that
that UPS receipt was for the two cartridges we had received
earlier. But at the time we considered the UPS receipt proof
that we had received the package and no way of proving that we
had not received the cartridges, so we mailed them a check.
Second mistake.
Several months later Shirley started to receive calls from
an Ikon representative claiming that we had ordered 12
cartridges and asking for payment of $987 for three cartridges
he claimed were shipped. He became rude and threatening,
probably thinking that he could frighten her into sending
another check.
I then addressed a letter to the CEO of Ikon Supply Service
stating all the things that I have just mentioned here and
ended it by writing: ``We are a charitable organization
operating on a very limited budget and supported solely on
donations by individuals and small companies. We cannot
understand why you would want to take advantage of someone like
us. By copy of this letter we are asking the Los Angeles County
District Attorney's Office to investigate this situation for us
and to determine why we were billed $1,964 for six cartridges
worth at the most $360. A copy of this letter is being sent to
the Better Business Bureau and the Conoga Park Chamber of
Commerce.''
The Los Angeles County District Attorney referred my letter
to the Postal Inspection Service. On September 10, 1999, I
received a phone call from Mr. C.F. Dudley, a postal inspector.
In response to his questions I repeated most of what I have
already said here. He said they were taking action against
Ikon. Apparently they had swindled others.
I have since learned from a news article dated March 16,
2000, that William H. Chatham, the owner of Ikon Supply
Service, was sentenced to 300 hours of community service and
ordered to pay $7,500 in fines and $20,428 in restitution to
the Naperville, Illinois office of Hartford and Feed My People,
thanks to the investigative service. Now we have not seen any
of this money. The two checks we sent to Ikon were endorsed by
William H. Chatham. If Mr. Chatham is looking for a place to
perform his community service, Feed My People is, as always,
looking for volunteers to help us meet our goals. I have got
several jobs I can think of for him.
Chairman Bond. I was going to suggest that that would be a
great place. We could use him on some of the heavy lifting.
Mr. Everding. We certainly could use him.
Thank you, Mr. Chairman, for permitting me to testify
before this Committee.
Chairman Bond. Thank you very much, Mr. Everding. It is
disgusting when we see people preying on not-for-profits that
are operating to do very, very important work using volunteers.
This is, unfortunately, an occurrence when we talk about scams
affecting small business. In the cramming hearing we had
representatives from churches talking about how they had been
abused by these unscrupulous operators. Thank you so much for
telling your story and we hope that your example will serve as
a warning to not-for-profits, charities, churches and others
that they too can be victimized by these frauds.
Mr. Everding. Yes, sir. We passed that information around
to all of our fellow charities around the St. Louis area.
Chairman Bond. We appreciate that and I hope that your
story and your experience will be taken to heart by others.
This is a busy day with other hearings. If you have further
thoughts, as you hear from the other witnesses who are here, we
would ask that you submit your questions or your further
comments in writing within a week. Thank you very much for
taking the time to come and tell your story, and we very much
appreciate your being here.
Now we will call Mr. Peter Grosfeld of Miami, Florida.
Thank you, Mr. Grosfeld, and welcome.
STATEMENT OF PETER GROSFELD, MIAMI, FLORIDA
Mr. Grosfeld. Thank you. Good morning, Mr. Chairman. Thank
you for allowing me to testify at your hearing, ``Swindling
Small Businesses: Toner-Phoner Schemes and Office Supply
Scams.''
I began working for ABC telemarketing in June 1997. I was
hired to be their telemarketing manager and was placed in
charge of their main phone room. My job was training all the
new hires and making sure that the FTC-approved phone
presentation was the only one being used. Before I was hired,
the FTC had shut this company down. Prior to being allowed to
resume business they had to place a performance bond and the
FTC had to approve their phone presentation. I was hired to
make sure that the telemarketers were complying with this new
phone presentation.
This company's main product was copier toner. They sold
toner to schools, religious institutions, daycare centers,
banks, and basically any type of small business. Any business
could fall victim to their sales practices. The size of the
business was not important. Having enough leads for the
telemarketers to call on a daily basis was.
The phone presentation being used by the employees that
were hired before the FTC sanctions implied that the call was
being made by the customer's normal supplier. For example,
``Hi, this is Peter and I am just calling to double-check the
model number of the photocopier.'' The key words here are,
double-check. They imply that we know the model number of the
photocopier and thus we are your normal supplier.
Once this model number was given, the telemarketer was
trained to name the machine. For example, the person would come
back and say model number 2020. The telemarketer would say,
``That is your Xerox machine; that checks.'' Again leading the
person to believe that the caller was their normal supplier.
The rest of the phone script would continue that it was time
again for their yearly sale and that we would be shipping your
order a little bit ahead of when you would normally get it so
that you would be able to take advantage of it. As a handshake
they would ask the person to spell their last name.
The mistaken shipment pitch was also being used by former
employees that returned after the sanctions and it started the
same way. After the model number was established the
telemarketer would tell a story about another company close by
that had the same machine, and that they were sent toner before
it was realized that they had switched machines. Since this
company was just down the road, would it be possible if we sent
their toner over to them a little bit ahead of when they would
normally call to order it?
As a new person in the phone room learned the approved
phone presentation they would be moved closer to the older
employees where they would learn the different variations of
the pitch. The only printed copy of the phone script was the
approved one. Every once in a while I would find a handwritten
copy of a non-approved phone presentation but everyone was told
to keep those out of the building. They had learned from their
previous FTC raid what not to have in the phone room.
Since this phone call's real objective was to trick a
person into placing an order, the price was never discussed.
The telemarketers were never trained in the prices of the toner
they were selling. Not only was the price of the toner not
discussed; the amount of toner being shipped was never
discussed either. Technically, a sale had not been made. The
price and quantity of toner had not been established. The
following day is when the sale was made. The day after the
original call was placed, a confirmation sales call was made.
This call was taped and most of the information about the sale
was disclosed.
For example, ``Hi, my name is Peter and I am calling from
the ABC company on a recorded line about the toner that you
ordered yesterday with Sally. I am calling back today to go
over the shipping and billing information so that we can get
this toner over to you. The order called for eight, but we are
only shipping four boxes of toner at 250 a box for a total of
10 54 98. Your address is 1410 West Main Street, on and on.''
If the person objected, the tape was stopped. If the
objection was overcome, the tape would be resumed. If not, the
tape would be rewound for the next call.
The amount of toner that was ordered was important to get
on tape because it enabled the shipping of future toner. This
second call was made as soon as the first payment was received.
``Hi, this is Peter from ABC telemarketing and just letting you
know that the second half of your order is on the way to you.
You remember, last month's toner was for eight boxes but we
only shipped you four. We just shipped the remaining four boxes
of toner and they are on the way out to you; we will call you
next month when your regular order goes out.''
From then on a call was made every single month notifying
that this month's regular order just went out and we would call
next month when the regular order was to be shipped. This would
continue until someone questioned the price or noticed that
they should not be paying for toner.
After working for this company for approximately 2 months I
started catching on to what was happening. As the new employees
left my direct control they would start learning variations of
the phone pitch. This enabled them to have more orders, thus
earn larger bonuses. I brought this to the attention of the
owner and he assured me that he would look into it and fix the
matter. I kept bringing it up at all meeting for about 3 weeks.
I was then taken out of the main phone room and placed into the
confirmation sales room.
It was during my time in the confirmation phone room that I
learned the true nature of the business that I was working for.
The 50-plus telemarketers in the main phone room were really
only looking for people who either were new at their job or
just plain did not care. The first call was set up for the
confirmation call. The confirmation call was geared only to get
the person on tape so that their company could be sent a bill
for about $1,000. Then just wait and see who paid, keep on
sending toner and charge outrageous amounts of money until
someone noticed.
In conclusion, I would like to express the need for much
stiffer penalties for any company or their owners that are
caught and convicted of telemarketing fraud.
Thank you for the opportunity to testify before this
Committee.
[The prepared statement of Mr. Grosfeld follows:]
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Chairman Bond. Mr. Grosfeld, ABC telemarketing obviously is
a supposed company name. Was this a single person--who was the
real brains behind this operation?
Mr. Grosfeld. I was told not to answer any specific
questions at this hearing, Mr. Chairman.
Chairman Bond. All right. Do you know how much he collected
in checks.
Mr. Grosfeld. Yes, I do. I can tell you that every Monday
morning there would be a little party at about 10 o'clock when
the checks totaled over $250,000. And that was every single
Monday morning.
Chairman Bond. Just thinking generally without getting into
the specifics here, what kind of enforcement actions would be
effective to take the man behind ABC telemarketing and people
of his ilk out of the field permanently? Do we need criminal
sanctions?
Mr. Grosfeld. I do believe that they do border on criminal
practices. But I believe the money is what they are after, so
one of the main things that has to be done is taking their
money away. Most of the fines that I am reading about or
hearing are basically slaps on the wrist, and it is the cost of
their doing business.
Chairman Bond. Three hundred hours of community service is
not much of a deterrent unless they show up at Feed My People.
I want to be there to watch that community service. But I think
that that might be a problem.
Do you have any information regarding whether your former
employer is continuing to engage in similar activities?
Mr. Grosfeld. As of right now, no, I do not.
Chairman Bond. Thank you very much, Mr. Grosfeld. As I said
earlier, we will have additional questions for the record. We
very much appreciate your coming to be with us and giving us an
inside look at how these scams operate.
Mr. Grosfeld. Thank you, Mr. Chairman.
Chairman Bond. Thank you, sir.
Now I would like to call Mr. William R. Duffy, president
and chief executive officer, Imaging Supplies Coalition for
International Intellectual Property Protection Inc. of
Lexington, Kentucky, and Ms. Tricia Burke, vice president of
Office Equipment Company, Inc., Louisville, Kentucky on behalf
of Independent Office Products and Furniture Dealers
Association of Alexandria, Virginia.
This has got to be a major headache for your business. Let
me now call on Mr. Duffy to begin the presentation.
STATEMENT OF WILLIAM R. DUFFY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, IMAGING SUPPLIES COALITION FOR INTERNATIONAL
INTELLECTUAL PROPERTY PROTECTION INC., LEXINGTON, KENTUCKY
Mr. Duffy. Thank you, Mr. Chairman. I am delighted to have
the opportunity to speak to you today regarding the toner
phoner schemes that are swindling small businesses and costing
manufacturers an estimated $125 million annually at
manufacturer's cost and also causing significant damage to
their brand reputation and loyalty.
The Imaging Supplies Coalition is a non-profit trade
association made up of original equipment manufacturers of
consumable supplies such as toner, toner cartridges, ink
cartridges, and ribbons, and also the equipment in the printer,
copier and fax industry. The members of the coalition are
Brother International, Canon, Epson, Konica Business
Technologies, Katun, Lexmark, OKI, and the Xerox Corporation.
The mission of the coalition is to protect our members'
customers from misrepresented products and services by seeking
worldwide protection of intellectual property and related
assets of the imaging supplies industry's distributors,
suppliers, and manufacturers. This is accomplished by training
and education in counterfeit product identification, methods of
product security, techniques for avoiding telemarketing fraud--
the focus of today's hearing--and by promoting laws and their
enforcement.
Since you have already heard this morning about these scams
I will focus my testimony on the scope of the problem that has
been plaguing our industry for approximately 20 years. I will
also discuss the trends we see and what the ISC members and
other OEM's have done and actions we plan to take to curtail
the fraudulent telemarketing of copier and printer toners and
cartridges.
A 1999 survey of original equipment manufacturers in the
industry estimated that intellectual property violations exceed
$1 billion at retail per year on a worldwide basis.
Telemarketing fraud was reported as the second largest problem;
second only to product counterfeiting.
The revenue impact is almost double what was reported in
our 1997 survey. Twenty percent of the respondents reported a
significant increase in telemarketing fraud, 30 percent a
moderate increase, and 30 percent said that it had remained the
same. The survey also revealed that 90 percent of the
companies' complaints regarding telemarketing fraud came from
their end user customers, while 10 percent came from authorized
dealers and companies' own employees.
Xerox alone receives over 5,000 complaints a year. Of the
complaints received, 39 percent report being victimized while
61 percent reported attempted solicitations. This ratio of
attempts versus swindles has improved since our 1997 survey
which I would like to think is a direct result of our various
education programs and the anti-telemarketing fraud programs by
the FTC and others.
Revenue impact and lost profits are only part of the
problems manufacturers must contend with as a result of this
illegal activity. Perhaps even larger than the financial loss
is the damage done to the company's brand and customer loyalty.
OEM's spend virtually hundreds of millions of dollars in
product development and manufacturing to ensure that their
customers receive the highest quality printed output from their
printers, copies, and fax machines. In cases where the
telemarketing fraudsters do deliver the product it is often of
lower quality resulting in poor output and can also cause
damage to the machines.
This results in technical support hotline calls, service
calls, and dissatisfied customers. Customers look to the
manufacturer to solve these problems and the OEM's do address
them at considerable expense since they want to ensure customer
satisfaction and continued brand loyalty which certainly
affects future hardware and supplies purchases.
Additional problems are created for the legitimate hardware
and supplies resellers. Many of them are small, independent
businesses who invest in sales and service training, product
inventories, and sales, service, and marketing expense. They
must compete with these scam artists, and like the
manufacturers, lose revenue, profits, and must service the
customers once the fraud is discovered. State, local, and
Federal Governments lose when legitimate jobs are lost and
taxes are not paid. Basically everyone loses but the scam
artist.
Recognizing all of these problems and wanting to ensure
customer satisfaction, the OEM's have undertaken various
programs to educate their employees, resellers, service
providers, and end users. The Imaging Supplies Coalition has
developed and implemented a telemarketing incident reporting
process for the OEM's who did not already have one in place.
This closed-loop process ensures that complaints are captured,
reported, and most importantly, that the customer is satisfied.
Since our inception in 1994, we have published numerous
articles on the subject in various industry trade publications
which are targeted at the manufacturers and resellers in the
industry. We have also published a number of end user articles.
As part of our efforts to educate our resellers, we speak
at industry seminars sponsored by various industry trade
associations such as BTA, the Business Technology Association,
what was formerly BPIA, now known as the Independent Office
Products and Furniture Dealers Association, as well as
conferences sponsored by various resellers.
We publish a quarterly newsletter. We have established a
web site. It describes how to spot a scam, the FTC
Telemarketing Sales Rule, and links to the FTC web site and
various consumer protection agencies, as well as the OEM's. We
even provide a list of all 50 States' attorneys general offices
and fraud contacts so that consumers can report these scams.
All of this information, including our 1999 survey, is
published and can be downloaded by our customers.
We run an annual conference and in the past we have had
representatives from the Federal Trade Commission and the
manufacturers speak. We had Steve St. Claire from Iowa, a
member of Attorney General Tom Miller's staff, discuss how his
State has successfully dealt with fraudulent telemarketing
including toner phoners. We have heard cases where
telemarketing fraud boilerrooms post ``Do not call Iowa'' on
the wall. This shows that measures can be effective and it is
our goal to have all 50 States on the do not call list. In
1999, we had both a keynote speech and telemarketing fraud
seminar conducted by investigative reporter and the author of
``Scam School,'' Chuck Whitlock.
Last year, the Imaging Supplies Coalition was awarded an
Association Advance America Award from the American Society of
Association Executives for our telemarketing fraud process and
education. In our short history, we have done a great deal to
help combat these scams.
The manufacturers are committed to continue to battle these
crimes that so adversely impact their companies and their
customers. You will hear later about Project BOSS, Banish
Office Supply Scams, from the Federal Trade Commission. The
members are committed to supporting that by distributing the
materials from the FTC, linking to the web sites, and getting
the word out to their customers.
In summary, we have been battling these crimes for many
years and we are making progress. The manufacturers have and
will continue to spend considerable resources, both time and
money, in the fight to stop this illegal activity. We believe
by working together and utilizing all available Government
resources we can have success in stopping these crimes and
protecting our customers.
I thank you for your time today and welcome any assistance
you can provide us in our fight against telemarketing fraud.
[The prepared statement of Mr. Duffy follows:]
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Chairman Bond. Thank you very much, Mr. Duffy.
Now, Ms. Burke.
STATEMENT OF TRICIA BURKE, VICE PRESIDENT, OFFICE EQUIPMENT
COMPANY, INC., LOUISVILLE, KENTUCKY, ON BEHALF OF INDEPENDENT
OFFICE PRODUCTS & FURNITURE DEALERS ASSOCIATION, ALEXANDRIA,
VIRGINIA
Ms. Burke. Mr. Chairman, thank you for allowing me to
testify today before you at today's hearing on this very
important issue affecting small businesses like mine. I am here
testifying as a small businesswoman and on behalf of the
Independent Office Products and Furniture Dealers Association.
Before I tell you about our association and what we are doing
to combat this problem, let me first tell you about my
business.
I am Tricia Burke, vice president of OEC, Office Equipment
Company, in Louisville, Kentucky. We are family-owned and -
operated and we were founded in 1907 by A.E. Meffert. My
grandfather bought the company in 1934. Office Equipment
Company has been in our family for three generations. OEC is a
small family-owned company with 35 employees that sells office
products and furniture, toner being one of our key products.
OEC does about $8 million a year in sales and we lose roughly
$25,000 a year in business due to telemarketing scams.
Now that I have told you a little bit about myself and our
company, let me focus the rest of my comments on how
telemarketing scams are affecting my business and what we and
the association are doing to combat this problem in our
industry.
Each year the office products industry loses $225 million
to telemarketing scams. This is a staggering figure for
companies like mine to comprehend. Not only are these scams
having a detrimental impact on my industry, it is estimated
that each year consumers lose roughly $40 billion to
telemarketing scams.
OEC receives about 60 complaints a year having to do with
this issue. You might not think this is a significant number of
complaints for a business to receive each year, but for one
issue a small business like ours, OEC, this is a significant
amount. My goal as vice president of OEC is to make sure that
our company is competitive in today's marketplace while
ensuring quality service to our customers. I am not able to
focus on this goal when I am spending valuable time each day
trying to figure out how we can fix the problem brought on by
unscrupulous telemarketers.
When I am focusing on how to handle ramifications on our
business brought on by these types of scams that means there is
less time for me to focus on our business and the customers we
serve. This is a tremendous burden for small businesses like
mine. We need to focus our attention and energy on our
business, making sure they are profitable, that we are serving
the customer, and not combating abuse by those trying to scam
customers.
Let me tell you a personal story of how telemarketing scams
have affected my business and my relationship with my
customers. Back in March 1995 a gentleman by the name of
``Terry Sullivan'' was making phone calls to office products
dealers throughout the States of Indiana and Kentucky letting
them know that he was running a contract operator service for
Ameritech pay phones and he was setting up a local office in
the area. Mr. Sullivan was extremely knowledgeable of the
office products industry. He told dealers that when his company
orders from dealers his company has a policy that they pay
their bills off statement at the end of the month and that a
check would be cut within 5 days. We liked that.
Mr. Sullivan proceeded to tell the dealer that he was in
the market to buy transcribers and recorders. He bought four of
each. An office products dealer in Indiana proceeded to deliver
the merchandise to Mr. Sullivan's company. When the dealer went
to collect at the end of the month, Mr. Sullivan was nowhere to
be found. In fact, the bill was never paid, the phone was
disconnected, and when the dealer went to the address given by
Mr. Sullivan to see what was going on, all that was found was
an empty office with empty transcriber and recorder boxes. That
means he did get his merchandise.
This was not an isolated incident, but happened to a number
of small businesses in the Indiana and Kentucky areas. I hate
to say it, but OEC was one of those small businesses that fell
victim to Mr. Sullivan's illegal telemarketing scam. Our
company received a call from ``Terry Sullivan'' back in 1995
where he proceeded to tell our customer service representative
a similar story. However, instead of ordering transcribers and
recorders from OEC, he ordered a Panasonic microcassette
recorder worth $300. When we followed up in our credit check
process we discovered that the information Mr. Sullivan
provided was false.
As vice president of OEC, I do everything I can to make
sure our employees are trained to catch these type of scams.
But the sad reality is, until an individual actually
experiences it firsthand or is knowledgeable about these type
of scams, you do not know what signs to look for. Looking back
I wish we would have done some things differently, as I can
imagine everyone who has been scammed does. But unless
something is done to seriously crack down on telemarketing
scams, small businesses are going to continue to be a target.
Today is the first step, but small business owners like myself
need to be provided with the tools that will help us recognize
the signs of these scams before we are bilked out of thousands
of dollars.
Now let me give you another example of how these scams not
only hurt my business, but more importantly, my relationship
with a customer. In the spring of 1998, a gentleman began
calling companies in the Louisville area telling them that he
was in the copier business and could provide them quality
service at an inexpensive price. The gentleman proceeded to ask
the companies he called for the model number of their copiers
so that he could send them toner.
When asked what company he was calling from, the gentleman
informed the dealer he was calling from none other than OEC,
Office Equipment Company. Shortly thereafter, we received a
call from an OEC customer who had been contacted by this
gentleman. The customer asked me if we called earlier trying to
sell them copier products, and if so, why did OEC need their
copier model numbers? I assured this customer, who has been
doing business with us for years, that we were not making these
calls and that we only sell them the products they order. We
informed our OEC employees about this situation and let them
know that someone was out there misrepresenting us. We wanted
them to be aware of the incident and to keep us informed of any
additional complaints.
As a company, we may only receive 60 complaints a year from
customers dealing with scams, but OEC receives dozens of calls
a week from those trying to scam our company out of money or
products. These scams range from selling us advertising in
publications we have never publicized in or even heard of, to
selling us light bulbs, janitorial products, copier toner and
supplies. The caller will ask to talk to the person in charge
of a particular department, the general office, maintenance,
marketing, copy room, then proceed to use a hard sell approach.
Those involved in these criminal activities hurt companies like
mine who are legitimate resellers of office products and ``play
by the rules.''
Our association, the Independent Office Products and
Furniture Dealers Association is working hard to combat it. We
have come up with a brochure that we make available to our
customers to be able to send out to their customers informing
them of the situation.
Chairman Bond. If you do not mind, we would like to have
copies of that for the members of the Committee and for the
record.
Ms. Burke. Sure. We have hundreds for you.
Chairman Bond. I do not need hundreds, but thank you.
[Laughter.]
Ms. Burke. This has been a wonderful opportunity for me to
come before you and tell you how telemarketing scams are
affecting my business. I would like, before I leave, just to
offer a couple suggestions.
Telemarketing scams are a problem in this country not just
for businesses like mine but for businesses large and small.
According to the FBI there are 14,000 illegal telephone sales
operations bilking consumers in the United States every day. It
is sometimes hard to distinguish between reputable
telemarketers and criminals who are using the phone for
fraudulent purposes. But if you know what to look for you can
identify the ``red flags of fraud.'' This is why the best thing
that the Government can do for businesswomen and men in this
country is to provide them with educational tools and resources
that will help them avoid being taken advantage of by
telemarketing scams.
Mr. Chairman, thank you for this opportunity and we would
be happy to work with you on a solution to this problem, and we
will answer any questions you might have.
[The prepared statement and attachment of Ms. Burke
follow:]
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Chairman Bond. Thank you very much, Ms. Burke. Let me ask
very briefly first, Mr. Duffy, can you give us any idea of why
the frequency of this type of fraud seems to have increased so
significantly? From your standpoint do you see any reason why
this should be so much more prevalent now?
Mr. Duffy. I think there are really a couple of basic
reasons. First of all, there is dynamic growth in the industry.
The industry is roughly a $25 billion industry in the United
States growing at $28 billion in the next couple of years.
There are some 52 million machines that use imaging supplies
installed in millions of establishments in the United States.
The compound growth rate over the last decade has been about 10
percent year to year. So the industry is growing.
I think that the penalties are low. They are not a
deterrent to these telemarketing fraudsters. And frankly, I
think we see the impact has doubled in our survey because, I
think, we see better reporting of it. We see better reporting
from our various constituencies.
Chairman Bond. So it has been there but we are just now
beginning to see the extent of it?
Mr. Duffy. Right. I believe it is just the tip of the
iceberg.
Chairman Bond. That is scary. You have indicated some of
the steps your members are taking. Are these fraudulent
operators getting products from the original equipment
manufacturers, from your people, or are they just dealing in
the aftermarket? Do your individual members have a means of
cutting off supplies to these fraudulent operators?
Mr. Duffy. Typically, they do not buy from the
manufacturer. There, of course, is a very legitimate
aftermarket business in office supplies that many reputable
companies represent. Typically, these people would buy the
product offshore. In many cases it also involves trademark
violations, certainly tradedress violations. You can see that
on some of the examples up here today using the HP trademarks
on the invoices, for example, and on the material itself.
So there are some suppliers outside the United States that
these people would buy the raw product from. Typically they
repackage it, put their own labels on it, and as I mentioned
there are other intellectual property crimes involved in it
also.
Chairman Bond. There are not, in your view, sufficient
penalties to discourage those frauds?
Mr. Duffy. I think as the previous witness said, it is a
cost of doing business. It is a slap on the wrist. In my view,
the only penalty that will work is some criminal action and
jail time.
Chairman Bond. Thank you. Ms. Burke, you said that you
needed to get some additional tools to help prevent this kind
of unfair competition which is not only a scam and a fraud on
your customers, either potential or actual customers, but
obviously a great loss to them. Are there any other tools that
you would suggest? What kinds of things specifically do you
need besides the information that you put out in your bulletins
and other sources?
Ms. Burke. I think the best opportunity to address this
issue is, to educate consumers as much as we can. I know
brochures are one way, but to keep talking about it; the whole
idea of top-of-mind awareness. I know with our company when
there are buyers of product, it is very important that people
have effective procurement methods--that there really are
designated people at a company who are the one and only who can
make those purchases. Usually those folks, after week two of
being in that position are extremely assertive at saying,
``No'' on the phone, and they know that those things are not
legitimate.
But where there is danger is when people go on vacations
and things like that and there is the temporary assistant
person who is just doing it this week. I would encourage
companies to have a game plan. We all have game plans when it
comes to fire drills. Let us have a game plan when it comes to
procurement so that there are designated buyers. When you do
orientation of employees, people are made aware of this issue
and that is enforced within a company.
So I think the more education--I realize there is
discussion here too regarding additional laws and things like
that. I want to say that there are legitimate telemarketers out
there, and in the office products industry there are very
legitimate people who are calling and sell by phone. But to
deal with the scam artist, it is very important to just say,
``No;'' to come up with methods.
Chairman Bond. Is your association working with local,
State, and Federal law enforcement agencies? Do you have a game
plan for getting these people turned over to the law
enforcement community?
Ms. Burke. I know we are involved with coming up with more
educational processes. But to be honest, I do not know that--
awareness has been our key goal, but working with the different
law enforcement agencies, I do not know at this point if we
are.
Chairman Bond. Thank you very much, Ms. Burke. Mr. Duffy,
again we will have questions from the rest of the Committee. We
thank you very much for your time and being here today.
Now I would like to call the fourth panel, Ms. Jodie
Bernstein, the director of the Bureau of Consumer Protection in
the Federal Trade Commission. Again, welcome, Ms. Bernstein.
Glad to have you back with us to discuss another fun and
interesting area of fraud.
STATEMENT OF JODIE BERNSTEIN, DIRECTOR, BUREAU OF CONSUMER
PROTECTION, FEDERAL TRADE COMMISSION, WASHINGTON, D.C.
Ms. Bernstein. Thank you, Mr. Chairman. It is a great
pleasure for us to appear at your hearings, which are
especially valuable to us because they help to call attention
to the particular issues that we have to face today. Nothing is
better than making people aware of these scams so they can
prevent them. Again, I will summarize the Commission's full
statement, if I may.
Chairman Bond. Your full statement will be made part of the
record and we hope to have that avilable for the media and
others, and I appreciate your making some summary comments.
Ms. Bernstein. Thank you. I wanted to point out also, of
course, that the Commission wants to thank you, Mr. Chairman,
and the Committee again for holding these hearings.
The FTC has had a long tradition of protecting consumers
and businesses against fraud, including office supply fraud,
and we appreciate the chance to discuss them with you and the
Committee. In just the last 4 years the Commission conducted
three law enforcement sweeps targeting office supply fraud,
Operation Copycat, Operation Clean Sweep, and Operation
Misprint. During these sweeps the Commission filed 19 Federal
court actions against more than 45 companies and individuals.
States and other Federal agencies participated in the sweeps by
filing 17 additional cases of their own.
Office supply fraud cases have a common pattern that
starts, as you know and have heard from other witnesses, with
the scammers placing an unsolicited telemarketing call to a
small business or not-for-profit organization and they pitch,
most always, copy machine or printer toner, hence the
designation ``toner-phoner fraud.'' Generally the callers make
the recipients feel as if they are dealing with their regular
supplier.
Sometimes the telemarketers try to get the name of the
employee, or the brand or serial number of the copier the
office uses under the guise that they are verifying existing
records. At other times the caller merely asks the employee if
the business wants to get a free gift or a sample. The bottom
line is that through these false pretenses, the caller
seemingly gets somebody's consent to ship office supplies or
makes it appear as if the consent or the authorization has been
given.
Shortly after that, the business or the organization
receives its supplies, sometimes, usually a smaller quantity
and a lower quality than expected, and separately from the
supplies, always an inflated bill. These bills usually contain
information like an employee's name or the brand of copier
machine that makes the bills really look legit.
These sales practices are illegal and violate Federal laws
like the Telemarketing Sales Act. The Telemarketing Sales Rule
prohibits misrepresentations and requires up-front disclosure
of the purpose of the call and the material conditions of the
offer. We prosecute defendants to stop these practices, impose
bans and bonding requirements on specific types of
telemarketing, and obtain redress to give money back to the
victims of the fraud. That is always our principal goal, to get
redress and get the money back to the businesses that have been
victims.
As a result of settlements in several sweep cases and other
FTC law enforcement actions, the Commission soon will be giving
more than $4 million in redress to small businesses and not-
for-profit organizations that lost money to these scams. The
Commission is pleased to announce that it obtained the largest-
ever civil penalty under the Telemarketing Sales Rule,
$500,000, as part of a recent settlement in an Operation
Misprint office supply case.
Unfortunately, office supply scammers, as you have also
heard, continue to prey on small business and others despite
our and other's enforcement and education efforts. One reason
is that the pool of potential victims seems to grow larger
every year. That is why the Commission is announcing what we
call Project BOSS. That stands for Banish Office Supply Scams.
It is a new grass roots education campaign that seeks to stop
fraud before it starts.
Because of the tremendous growth in the number of new small
businesses each year--and we are delighted with that figure--
educating new employees and volunteers to be aware of and on
the lookout for office supply fraud must be an ongoing effort.
Project BOSS builds on the past FTC education campaigns with
expanded industry and business association partnerships and new
materials for small business to use to banish office supply
scams.
With the help of our industry, business association, and
Government partners, the Commission hopes to distribute
educational materials to thousands of small businesses through
mailings and web site links. We recently forged a new
partnership with the National Association of Secretaries of
State through which participating Secretaries of State will
distribute BOSS materials to prospective new businesses at the
time that they register in the State to do business. Hopefully,
they will become aware of the problem by reaching them before
they become victims.
In addition, the Commission has created a page for small
businesses on our web site that provides information about
various office supply frauds and how to avoid them. The Small
Business Administration, the Better Business Bureaus,
Independent Office Products and Furniture Dealers Association,
the National Federation of Independent Business, the Yellow
Pages Publisher Association, the U.S. Chamber of Commerce, and
others have created or will create links on their web site to
ours.
We also have a new animated and attention-grabbing public
service banner ad for web sites that companies and
organizations may use on their sites to link to the FTC web
site, and a new tip sheet designed to look like a page from an
employee manual that employers may post or give to new
employees as part of training on office procedures. The Imaging
Supplies Coalition, Business Technology Association, the
International Sanitary Supply Association, and the Office
Products Wholesalers Association all have agreed to distribute
these and other educational materials to their members,
reaching more than 4,000 manufacturers, distributors, and
wholesalers of office products.
In addition, the Commission will distribute a new
Powerpoint and speech package that many people will be able to
use to spread the message, which we hope will be effective. Our
partners have helped us form this information chain, and
hopefully as the chain grows and is implemented it will reach
those who might fall victim to the fraud.
The Commission is going to continue to attack office supply
fraud in the courts as well. Through campaigns like Project
BOSS, the Commission will continue to spread the message and
take innovative measures in this effort to avoid fraud in the
first place.
Mr. Chairman, thank you again for giving the FTC the
opportunity to testify on our efforts, and hopefully together
we can bring more awareness to the American people about this
very damaging practice. Thank you and I will be glad, of
course, to answer your questions.
[The prepared statement and attachments of Ms. Bernstein
follow:]
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Chairman Bond. Thank you very much, Ms. Bernstein. As I
think we have mentioned to you before, a little over 30 years
ago I was chief counsel of the consumer protection office in
the Missouri Attorney General's Office, and you know some
things never change. The technology is new, the scams are new,
but the same old fraud are used. When you mentioned the sending
out of the free gift, that was a red flag 30 years ago; it
still works. An operating rule that I advised our citizens at
the time was, if an offer sounds too good to be true, it is. Is
that still operative today?
Ms. Bernstein. It certainly is, Mr. Chairman.
Unfortunately, these folks seem to be with us forever, and they
do use new technologies and new techniques. So I guess the
challenge to all of us is to try to use those techniques and
new ways of catching them and preventing them in the first
place. But certainly, if it sounds too good to be true, it is.
Chairman Bond. I thank you for your great information
efforts, and we are going to work with you and with the
associations and with the witnesses we have had here today. But
let us go to the law enforcement side of it.
During the time we were investigating the problem the
Committee uncovered two instances of individuals who were
subject to enforcement actions by the FTC and the Postal
Inspection Service for deceptively selling toner cartridges
apparently engaging in the same activity several years later,
merely using different company names. How large a problem is
this recidivism? I get the sense that these people just take a
fine or a requirement for community service as a cost of doing
business and gear up and keep going. What is your assessment of
the repeat offender situation?
Ms. Bernstein. We believe that it is a problem, and a
couple of years ago we really began to focus on it, on the
recidivism, because we were seeing the same thing that you
identified, Mr. Chairman. So we made a concerted effort to
target some, slightly at least, different approaches to begin
to deal with the recidivist particularly. First of all, we did
bring 50 sweeps initially, and then we went back and looked at
those to see if we could identify people who were engaged in
the same activities.
So we started first of all looking for stronger provisions
in our orders. We are imposing bans and bonds, and that has not
always been the case, significantly strengthening the
Commission's orders.
Then we began an operation we call Operation Scofflaw,
which was really to bring attention and prioritizing our
review, and monitoring and following up, on Federal court
orders. In the past our orders had been administrative orders.
Now for the first time the Commission has shifted to the
Federal courts and we made a determined or dedicated effort to
following those up.
The increased penalties that we seek there are, of course,
different than administrative cases. That is, we can seek civil
and criminal contempt. And we have. So we have not had a huge
number of people that have been subject to criminal contempt,
but we have had some, and some jail sentences have been imposed
on recidivists. So we are going to continue that effort. We are
trying to work with the Justice Department and others to make
that a more effective effort.
Chairman Bond. That was going to be my second question, but
you have answered it. It seems to me that when you go through
the mill the first time, you can enter an order and they pay a
fine. Having the additional order, having the court order I
guess is essential to bringing a much higher penalty action
against a subsequent involvement because once they go through
the motions, having that extra noose around their neck would
seem to me to be very effective. About how many of those
actions have you taken? Are these usually brought against just
the top individual in the company, or do you catch a number of
people typically?
Ms. Bernstein. Certainly we go after the top one. As you
know, as a former prosecutor, of course, we have to have direct
evidence of employees that might have been involved in it. We
have brought cases against at least eight recidivists, criminal
contempt actions. And to the extent that we can develop
evidence--and of course, it is easier to get civil contempt
than criminal, but we are really focusing on criminal contempt
now. We will try to get as many of the others who were involved
in the operation as we can. Principally, we have gone after the
main operator.
Chairman Bond. Mr. Grosfeld testified earlier that his ex-
employer was obtaining lists of businesses to call from
commercial list providers. Again, Ms. Burke mentioned the fact
that there are many legitimate telemarketers so you do not want
to crack down on them. But are there any circumstances in which
FTC has brought action against list providers who were working
in concert with the toner-phoner fraud perpetrators?
Ms. Bernstein. It is a tough one to say but it does kind of
summarize what the whole thing is about. Yes, we have tried to
focus on list providers, and as you know, the standard for
going after a list provider who is a third party would be
``assisting and facilitating,'' the legal standard, and to the
extent that they knew that they were facilitating and assisting
in the basic fraud--we have done that.
We have actually pursued one list enterpriser by itself and
actually brought a lawsuit under the Telemarketing Sales Act
for those violations. That resulted in a considerable recovery.
To the extent that we can include in our orders prohibitions on
obtaining lead lists where we have found them to be abused in
the past, we are also doing that. Then we can monitor that as
we go forward.
I meant to mention one other thing which I think may be
effective in connection with recidivists, Mr. Chairman. That
is, we are imposing in our orders requirements that the
convicted or the defendant notify us of a change in employment
and tell us where they are working if it is a new job or new
opportunity so that we can monitor those activities. That
should be helpful too in terms of following up on those people
who seem to go from one enterprise to another.
Chairman Bond. I will discuss with you later some ideas on
how to follow up with them. I know that that is an interesting
challenge.
Let me ask one final question. Are there steps that we in
Congress can take to help you minimize this deceptive activity,
and particularly the repeat activities that seem to be hitting
so many small businesses and not-for-profits?
Ms. Bernstein. One thing that I have just briefly been
thinking about is the extent of our penalties are $11,000 per
violation. Now as you know, Mr. Chairman, that is an old
statutory provision, and perhaps it has not kept pace.
Chairman Bond. Mr. Grosfeld said $250,000 a week. You could
clear a nice amount of money and still pay $11,000 a day if you
are raking in $250,000 a week. That is not bad.
Ms. Bernstein. That is right. And I mention it because I
really think it has not kept pace with what Congress has
imposed in other similar kinds of violations of various
statutes. I thought perhaps in the future that might be
increased substantially. It would help us a good deal, although
as I said before, redress is where we get the big bucks, if we
can locate the money.
I suppose finally, the FTC is still pretty small for
dealing with this extensive fraudulent operation. I know you
have been supportive of us in the past in terms of helping us
out with our resource needs.
Chairman Bond. It all comes back to appropriations.
Ms. Bernstein. Usually.
Chairman Bond. Ms. Bernstein, my sincere thanks to you and
to all our witnesses today. As I said, the record will be kept
open for a week for any comments from the witnesses, or those
who are here either in the audience or watching us by means of
TV coverage. We will be asking Committee Members to review the
record and submit any questions. We would ask that you reply to
those as promptly as possible.
And with our best wishes to everybody who is working to
focus attention on this fraud, to help identify it and drive it
out of business, our sincere thanks. The hearing is adjourned.
[Whereupon, at 11:08 a.m., the Committee was adjourned.]
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